Is Royal China International Holdings Limited (HKG:1683) A Sell At Its Current PE Ratio?
Royal China International Holdings Limited (SEHK:1683) is currently trading at a trailing P/E of 179.5x, which is higher than the industry average of 28.3x. While this makes 1683 appear like a stock to avoid or sell if you own it, you might change your mind after I explain the assumptions behind the P/E ratio. In this article, I will break down what the P/E ratio is, how to interpret it and what to watch out for. See our latest analysis for Royal China International Holdings
What you need to know about the P/E ratio
P/E is a popular ratio used for relative valuation. It compares a stock’s price per share to the stock’s earnings per share. A more intuitive way of understanding the P/E ratio is to think of it as how much investors are paying for each dollar of the company’s earnings.
P/E Calculation for 1683
Price-Earnings Ratio = Price per share ÷ Earnings per share
1683 Price-Earnings Ratio = HK$1.36 ÷ HK$0.008 = 179.5x
The P/E ratio isn’t a metric you view in isolation and only becomes useful when you compare it against other similar companies. Our goal is to compare the stock’s P/E ratio to the average of companies that have similar attributes to 1683, such as company lifetime and products sold. A quick method of creating a peer group is to use companies in the same industry, which is what I will do. 1683’s P/E of 179.5x is higher than its industry peers (28.3x), which implies that each dollar of 1683’s earnings is being overvalued by investors. Therefore, according to this analysis, 1683 is an over-priced stock.
Assumptions to be aware of
While our conclusion might prompt you to sell your 1683 shares immediately, there are two important assumptions you should be aware of. Firstly, our peer group contains companies that are similar to 1683. If this isn’t the case, the difference in P/E could be due to other factors. For example, if you compared higher growth firms with 1683, then its P/E would naturally be lower since investors would reward its peers’ higher growth with a higher price. The second assumption that must hold true is that the stocks we are comparing 1683 to are fairly valued by the market. If this does not hold, there is a possibility that 1683’s P/E is lower because our peer group is overvalued by the market.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.
